Beginner’s guide: What traders do with interest rates and FOMC market moves

For those on the trading scene, making trades on interest rates represents the most direct, liquid and scalable way to express a view on the economy, whether that view relates to inflation, recession risk, central bank policy or volatility.

What is interest rate trading?

Interest rate trading involves speculating on or hedging against changes in interest rates, central bank policy and the shape of the yield curve. Traders typically use derivatives such as Fed Funds futures, SOFR futures, interest rate swaps and options on these instruments to express views on where rates might head.

Unlike traditional bond trading — which blends credit risk, duration, liquidity and issuer-specific factors — interest rate trading isolates pure rate exposure. It focuses on how central banks steer financial conditions and how markets price those expectations.

Shifts in interest rate expectations frequently influence liquidity conditions, which can spill over into digital asset markets. For example, periods of tightening in 2022 to 2023 coincided with reduced risk appetite across major crypto assets, while the easing cycle beginning in late 2024 aligned with broader risk-on conditions. Crypto traders like to monitor macro signals to understand when volatility may increase.

Interest rate trading are commonly seen among:

• Hedge funds expressing macro views.
• Banks managing funding and balance sheets.
• Corporations hedging borrowing costs.
• Traders speculating on Federal Open Market Committee (FOMC) outcomes.
• Portfolio managers adjusting duration.

FOMC glossary: Terms to know

What are the key tools used in rate trading?

Interest rate traders rely on a toolbox of instruments to express directional, curve or volatility views. Each instrument reflects the expected path of central bank policy, although outcomes may differ. 

1. Fed Funds futures

Fed Funds futures are exchange-traded contracts on the average effective federal funds rate (EFFR) over a specific calendar month. They are the closest instrument to pure FOMC policy expectations. Fed Funds futures are quoted using the formula:

So, if a contract trades at 95.75, it reflects an implied average EFFR of 4.25% for that month.

Traders use entire strips of Fed Funds futures to map out rate expectations for each upcoming FOMC meeting. Tools like the CME FedWatch Tool convert these prices into probabilities of hikes or cuts.

Fed Funds futures are widely used to:

• Trade expected policy decisions.
• Hedge funding costs for banks and funds.
• Express views on near-term liquidity conditions.

2. SOFR futures

With the London Interbank Offered Rate (LIBOR) discontinued, the dominant short-term USD benchmark is Secured Overnight Financing Rate (SOFR). CME 3-Month SOFR futures (SR3) are now among the deepest and most liquid interest rate contracts.

SOFR futures share the same pricing convention:

Key features of SOFR futures:

• Underlying: 3-month compounded SOFR.
• Each 1 basis point (bp) move = $25 per contract.
• Deep liquidity across 20 to 30 quarterly maturities.

Unlike swaps, SOFR futures are linear, meaning no convexity. Traders may interpret this as being efficient for directional bets but creates differences when comparing to swaps.

3. Interest rate swaps (IRS)

Interest rate swaps allow traders to exchange fixed interest payments for floating ones (typically SOFR-based). 

• One leg pays fixed.
• One leg pays floating (e.g., SOFR + spread).
• No principal changes hands.
• Maturities range from one to 30+ years.

Swaps are used to:

• Receive fixed when expecting rates to fall.
• Pay fixed when expecting rates to rise.
• Trade curve shape (e.g., receive 2Y, pay 10Y).
• Hedge corporate debt issuance.

4. Options on rate futures and swaptions

Options (e.g., straddles, strangles, vertical spreads) allow traders to position on volatility, not just direction. Around major events like FOMC meetings, implied volatility rises most of the time, creating opportunities for both long- and short-volatility strategies.

Swaptions are options on swaps, allowing traders to enter a future swap at a predetermined rate. These are widely used in:

• Mortgage hedging
• Corporate risk management
• Curve and volatility strategies

In crypto markets, volatility-related tools such as Strike Options on Crypto.com may be used to navigate macro-heavy periods when markets anticipate major announcements or data releases.

5. Treasury ETFs

For non-derivatives users, Treasury ETFs provide convenient rate exposure:

• TLT (20+ year bonds) for long-duration bets.
• SHY (one to three years) for front-end exposure.
• Inverse or leveraged ETFs for tactical views.

What is FOMC trading and why does it matter?

FOMC trading refers to positioning before, during and after FOMC meetings, the eight scheduled events where US monetary policy is decided.

Markets are driven by:

• The rate decision (e.g., hike, hold, cut).
• The statement language.
• The dot plot.
• The press conference tone.
• The Summary of Economic Projections (SEP).

These are some well-documented patterns across FOMC events:

• Pre-FOMC drift: Bitcoin, Ether, select altcoins and equities may rise in the days before announcements, especially if many are expecting a rate cut.
• Volatility compression: Chicago Board Options Exchange's CBOE Volatility Index (VIX) tends to fall before the meeting.
• Volatility spike: Intraday volatility on FOMC days is significantly higher as observed with BTC, ETH and other majors.
• Discrete jumps in SOFR and Treasury futures at policy decision points.

FOMC trading is an important exercise among traders as the Fed directly influences the short end of the yield curve, which in turn affects Treasury yields, swap curves, mortgages, credit markets and risk assets including crypto. Given the 24/7 nature of crypto, it may exhibit quicker reactions during FOMC releases and see crypto traders move in and out of positions. 

Because of the speed of these reactions, some traders may rely on features like price alerts, watchlists and real-time charting tools, which the Crypto.com App encompasses, to stay informed during these events.

‘Priced in’ vs ‘surprise’

Markets rarely react to the decision alone. Instead, they move based on how the outcome compares to expectations.

• If the Fed is more hawkish than expected → Yields rise, futures fall
• If the Fed is more dovish than expected → Yields fall, futures rise

Traders monitor:

• FedWatch Tool (for probabilities)
• WIRP (Bloomberg’s implied rate path)
• OIS curves (policy expectations)

How traders position themselves around FOMC meetings

Interest rate traders may structure their approach into three phases: pre-FOMC, event day and post-FOMC. Crypto traders follow similar cycles, although the instruments and market structure differ.

Pre-FOMC trading

Before the meeting, traders primarily position based on expectations.

Common pre-FOMC plays include:

• Trading rate probabilities (e.g., cut, hold, hike) via SOFR or Fed Funds futures.
• Trading path changes, whether the Fed signals slower or faster adjustments.
• Going long or short volatility using options.
• Move heavily into stablecoins ahead of FOMC events to manage risk.

Implied volatility may rise into the event (due to uncertainty) and collapse afterward (‘vol crush’) as uncertainty resolves.

Event-day 

Event day is all about outcome against expectations.

1. Outcome vs expectation (directional)

Traders may use futures that straddle the meeting month.

• Expect more dovish than priced → Long futures, receive fixed
• Expect more hawkish → Short futures, pay fixed

2. Volatility trades

When implied volatility is relatively low, some traders consider strategies that benefit from potential increases in market volatility, such as buying straddles or strangles.

When implied volatility is relatively high, traders may instead evaluate defined-risk option structures that are designed to benefit if volatility stabilizes or declines.

Crypto markets may show a similar pattern. Volatility in BTC and ETH futures — especially on offshore derivative exchanges — tends to build ahead of major macro announcements and then cool off once the outcome becomes clear.

3. Curve trades around guidance

Guidance changes reshape the yield curve:

• Hawkish tone → Raises front-end yields → Curve flattens
• Dovish tone → Lowers front-end yields → Curve steepens

These can be expressed via 2Y to 10Y futures, swap curve trades or butterflies.

Post-FOMC trading

Once the dust settles, markets can overreact. Post-FOMC strategies among interest rate traders may include:

• Fading extreme steepening or flattening.
• Fading sharp spills in front-end futures.
• Trading mean reversion in swaps or SOFR strips.
• Reassessing crypto exposure after liquidity stabilizes, as the crypto market may experience ‘aftershocks’.

How interest rate futures are priced

Understanding futures pricing is crucial for rate traders.

Short-term rate futures (SOFR and Fed funds)

The basic formula:

Examples:

• If SOFR futures trade at 95.75 → Implied rate = 4.25%
• If Fed Funds futures trade at 95.90 → Implied EFFR = 4.10%

SOFR futures have a standardized $25 per bp sensitivity. This makes profit and loss (P&L) easy to calculate:

• A 10 bp fall would mean a $250 gain for a long position.
• A 10 bp rise would mean a $250 loss.

Convexity and swaps

Futures are linear. Swaps are convex, meaning rate drops benefit swaps more than equivalent rises.

Convexity adjustments are required when comparing futures-implied rates and swap-implied rates to avoid arbitrage.

Treasury futures pricing (conceptual)

Treasury futures incorporate:

• Carry (coupon income minus financing cost)
• Cheapest-to-deliver (CTD) bond
• Conversion factors
• DV01 (yield sensitivity)

Rate traders focus on implied yields rather than price alone.

Popular interest rate trading strategies among interest rate traders

How traders manage interest rate risks and common mistakes

1. Underestimating leverage and DV01

Rate derivatives are highly leveraged. A small move in yields can lead to outsized P&L swings. That’s why traders find it essential to track aggregate DV01 using volatility targeting.

2. Ignoring curve and basis risk

Traders who assume perfect correlation across instruments (e.g., swaps vs Treasuries) can experience unexpected losses.

3. Misunderstanding convexity differences

Futures and swaps behave differently. Without proper convexity adjustment, hedges may drift.

4. Over-trading macro events

FOMC days have wide bid and asks and sharp whipsaws. Traders may find that defined-risk positions (via options) are generally considered safer than oversized linear bets.

5. Ignoring liquidity and margin dynamics

Stress periods can cause thin liquidity, wide spreads and sudden margin calls.

6. Poor model governance

Strategies that work in low-volatility environments may fail in tightening cycles. Backtests must include multiple macro regimes.

You can use price alerts to track crypto’s response and manage volatility around FOMC events, all in the Crypto.com App.

Important information: This is informational content sponsored by Crypto.com and should not be considered as investment advice. Trading cryptocurrencies carries risks, such as price volatility and market risks. Before deciding to trade cryptocurrencies, consider your risk appetite. All forecasting methods, scenarios, and examples are illustrative and subject to market uncertainty. It is essential to do research and due diligence to make the best possible judgment, as any purchases shall be your sole responsibility.

FAQs about interest rate trading and FOMC moves

What does ‘interest rate trading’ mean in simple terms?

Interest rate trading means speculating on or hedging against changes in interest rates, typically using futures, swaps or options. Instead of buying bonds directly, traders use derivatives to express views on whether rates will rise, fall or change shape along the yield curve.

How do traders predict what the Fed will do?

They monitor Fed Funds futures, SOFR futures, OIS curves and tools like the CME FedWatch Tool, which translate market pricing into implied probabilities of rate hikes or cuts. Traders also analyze inflation data, jobs reports and the tone of Fed communication for signals.

What moves markets more: the rate decision or the Fed’s tone?

Usually the tone. Markets may price the rate decision ahead of time. Surprises in the press conference, dot plot or forward guidance tend to cause the biggest market reactions, especially in front-end rates and SOFR futures.

Why do crypto markets react to interest rate expectations?

Even though digital assets operate independently of the banking system, they remain sensitive to global liquidity cycles. When markets anticipate easing conditions, risk assets — including crypto — may experience shifts in sentiment.

Why do SOFR and Fed Funds futures move when the Fed speaks?

Because these futures reflect expectations of the average overnight rate in coming months. Any change in perceived FOMC direction — hawkish or dovish — immediately shifts implied future rates, causing futures prices to rise or fall.

Is interest rate trading the same as bond trading?

No. Bond trading involves credit risk, liquidity risk, coupon behaviour and specific issuers. Interest rate trading focuses on the movement of benchmark rates like SOFR, EFFR and Treasury yields using derivatives that isolate rate exposure.

What’s the difference between a steepener and a flattener?

A steepener is a trade that benefits when the yield curve widens (long-term rates rise faster or fall slower than short-term rates). A flattener benefits when long-term rates move less than short-term rates. Traders see these as common strategies around FOMC guidance shifts.

How risky is interest rate trading?

Rate derivatives can be highly leveraged. Even a 1 basis point move can translate into meaningful P&L changes. Traders would monitor DV01, margin requirements, curve risk and event risk, especially around FOMC and CPI releases.

How do rate futures use the formula ‘100 – rate’?

Short-term rate futures convert expected interest rates into price using this formula. For example, if traders expect 4.25% SOFR, futures will trade around 95.75. Traders can then express rate views through price movements rather than direct yield inputs.

Can beginners trade interest rates?

Yes, though with caution. Beginners may sometimes start with Treasury ETFs, which offer rate exposure without derivatives. Futures and swaps require a deeper understanding of leverage, volatility and macro calendar risks.

Why are FOMC days so volatile?

FOMC meetings resolve uncertainty about the path of future interest rates. Intraday volatility on FOMC days is historically much higher than other days, especially in S&P 500 futures, SOFR and Treasury contracts.